I used an alt today to see if it'd still work: http://cloud-2.steampowered.com/ugc/3314955328784279432/5B82141CAD9BA812...
http://cloud-3.steampowered.com/ugc/3314955328784283291/43EB4DC483D506B3...
Apparently they still let you use the hammer if you got it before the pets update. I thought it'd leave out the coliseum option now, but apparently not.
Well, obviously. Any 4* or 5* item = too good for T1 and T2 = must be put in T3.